Wednesday, 31 August 2022
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•          Recent sharp uptrend in EMU and US yields initially took a breather yesterday. Markets awaited national EMU CPI data. The correction in European gas and power prices at least was an ambiguous factor for European interest rate markets, too. First EMU inflation data (Spain, Belgium, Germany) were close to expectations. Still, German headline HCPI inflation touched a new cycle top at 8.8%, providing no sign at all that inflation might be on the eve of topping out yet. However, selling on bond markets mainly resumed in the US dealings. US house price data showed some further deceleration, but consumer confidence (Conference Board, 103.2 from 95.3) and especially US JOLTS job openings printed materially stronger than expected. The data suggest that there is still some work to do for the Fed to restore the balance between aggregate demand and supply. The debate on another 75 bps rate hike at the September meeting stays alive, both for the Fed and the ECB. In a flattening move, US yields changed between +1.8 bps (2-y) and -2.4% (30-y). German yields gained between 5.3 bps (2-y) and 0.2 bps (30-y). The US 2-y yield still struggles to clearly break beyond the 3.45%/3.5% resistance area. At 2.13%, the 2-y Euro swap yield now trades well north of the 2.0% June top. The prospect of the Fed intentionally slowing demand by keeping rates higher for longer continued to weigh on equities. US indices again lost about 1.0%. The EuroStoxx50 eased 0.92%.  On FX markets, the dollar showed a mixed picture and didn’t fully profit from the ongoing risk-off. The DXY index eased marginally to close at 108.77. This was mainly due to euro outperformance. EUR/USD closed at 1.0115, partially on higher EMU yields, but it was also supported by a correction in EMU gas and power prices. Sterling again didn’t profit from recent repricing, discounting a 4%+ BoE rate next year. EUR/GBP decisively broke of the summer downtrend channel to close at 0.8592. The Hungarian forint (close EUR/HUF 402,37) gained about 1.5% after the MNB raised its policy rate by 100 bps to 11.75% and reaffirmed its commitment to re-anchor inflation expectations.

•          This morning, Asian markets are trading mixed, which can be considered as a mildly positive given yesterday’s negative close in the US. China PMI’s (manufacturing 49.4 from 49.0, non-manufacturing 52.6 from 53.8) printed slightly better than expected, but the Chinese economy clearly isn’t out of the woods yet. The yuan finally regains some ground after the PBOC again set a stronger-than-expected fixing. USD/CNY drops to currently trade at 6.893. The dollar is ceding modest ground (DXY 108.55, USD/JPY 108.43, EUR/USD 1.014). Treasuries are little changed.
Later today, EMU HICP, given yesterday’s national data, probably will come close to the 9.0% Y/Y expectation. Core inflation is expected to rise to 4.1%from 4.0%. German labour market data are interesting too. In the US the ADP labour market report is expected to show net private job growth of 300K. However, given a new methodology, the figure maybe isn’t that easy to interpret. Interest rate markets maybe are ready for some consolidation going into Friday’s US payrolls report. On FX markets, the euro draws some comfort from the EC plans to reduces energy prices in the region. The nature and the effectiveness of the measures still are subject to a higher degree of uncertainty. Even so, if pressure eases further, there maybe is room for EUR/USD to regain some further ground in the 0.9901/1.0368 range, with 1.009 a first intermediate reference.

News Headlines

•          The British Retail Consortium published its monthly economic bulletin. Shop price inflation accelerated from 4.4% Y/Y in July to 5.1% Y/Y in August, the highest level on record (2005). Food price inflation rose to 9.3% Y/Y with the BRC’s data provider warning that such levels might return over the next six months. Non-food prices stabilized near July levels at 2.9% Y/Y. BRC Economist Dhillon warned that inflationary pressures are yet to see their peak with wholesale gas prices registering almost daily records.

.•         The head of the US’ Health and Human Services Department’s Administration for Strategic Preparedness and Response said that they will accelerate the transition of federal procurement of Covid shots to commercial sales. Lack of funding means that US citizen’s will likely from January need to obtain vaccines through insurers or pay for them by themselves.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway. Even a 75 bps hike might be on the table at the September meeting. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside short term.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT will hit max speed by September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments at Jackson Hole and the simultaneous sell-off in bonds & equities pushed the euro to new lows below parity. This year’s downward trend channel suggests more downside.

Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP finally broke out of the corrective downward trend channel since mid-June.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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